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SEC v. Peters

United States Court of Appeals for the Tenth Circuit · 1992 · Corporations
978 F.2d 1162 (10th Cir. 1992)
Updated
CorporationsInsider tradingTender offersEvidenceSection 14(e)Rule 14e-3Section 10(b)Rule 10b-5

Facts

Peters was a partner in Investment Management Group, and another partner, Ivan West, separately consulted for ERG in helping find an investor to make a friendly tender offer; that ERG work was excluded from the partnership. After Broken Hill agreed to make a tender offer for ERG stock, several private investors bought ERG stock shortly before the announcement and sold at a profit afterward. The SEC alleged Peters secretly viewed tender-offer documents West kept at IMG, then passed timing information to broker Ken Mick and former client Bernard Lounsbury, who traded and later repaid debts to Peters. At trial, Peters also presented his own good-character testimony and seven opinion character witnesses, while the court barred SEC cross-examination about prior fraud suits and sworn accusations against him.

Issue

Whether SEC Rule 14e-3 is valid without requiring proof that the defendant breached a fiduciary duty, such that the district court erred in instructing the jury otherwise. Also, whether the district court erred in barring the SEC from cross-examining Peters and his opinion character witnesses about prior fraud allegations and lawsuits.

Rule

Rule 14e-3, as authorized by Section 14(e), imposes liability for trading or causing trading while in possession of material, nonpublic tender-offer information when the person knows or has reason to know the information came directly or indirectly from an insider; no fiduciary-duty breach is an element of the rule. Section 14(e) gives the SEC broad authority to define and prescribe means reasonably designed to prevent fraudulent, deceptive, or manipulative acts in connection with tender offers, including prophylactic rules that ease proof problems in the tender-offer context. Under Rule 405(a), opinion character witnesses may be cross-examined about specific instances of conduct, including 'have you heard' or similar questions, and exclusion of such rebuttal may be an abuse of discretion when character has been made central to the defense.

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Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.
In Phoenix, Mira Solano learns from her cousin Owen Park that Owen is helping a private equity bidder prepare a friendly tender offer for Copper Mesa Robotics. Owen tells Mira the offer will be announced next week and asks her to keep it quiet. Mira buys Copper Mesa shares the same day, knowing the information is confidential and came from someone working on the deal.

If the SEC sues Mira under Rule 14e-3, which is the strongest argument for liability?

Explanation. Rule 14e-3, as upheld by the majority, imposes liability when a person trades or causes trading while in possession of material, nonpublic information relating to a tender offer and knows or has reason to know the information came directly or indirectly from an insider or someone working on the deal. The rule does not include a fiduciary-duty element.